Black Swan Redux
April 19th, 2011 4:18 pm Category: Optimization, by: John Hughes
In a recent article, I discussed what are known as “Black Swan” events. These unexpected, and extreme or severe events are frequently ignored and unplanned for by organizations. These are occurrences that are thought to be outliers and can be safely ignored. In that previous post, I mentioned a mathematical approach or formulation for modeling such incidents. But even if management does not use rigorous mathematical modeling, organizations should always have strategies and plans in place in order to deal with sudden, tectonic changes in their environments.
The recent earthquake and tsunami in Japan highlight the need for businesses to acknowledge and anticipate these worst-case scenarios. As the April 2nd edition of ‘The Economist’ magazine outlined, the supply of certain critical components and materials has been severely disrupted by events in Japan. For example, just 2 companies (Mitsubishi Gas Chemical and Hitachi Chemical) whose plants have been damaged, account for about 90% of the market for a specialty resin used to glue parts of microchips that go into a wide range of electronics. Obviously, the immediate customers of these 2 will feel the impact immediately. But ‘knock-on’ effects will ripple through Supply Chains all over the globe and as a result of the decreased output from these plants there will be companies all over the world that will find themselves unable to meet their own sales due to the constrained availability of this resin. And these consuming companies may never have known that they relied on the 2 affected firms or realized their vulnerability to disruptions. Another case in point is the battery in Apple’s iPod. This uses a specific polymer made by Kureha, which accounts for about 70% of that market. Again, their plant was also damaged in the recent disaster.
And the earthquake and tsunami have had other less obvious impacts on Supply Chains. For example, operations at some Japanese ports have been disrupted in the aftermath of the disasters. As a result, the worldwide availability and supply of shipping containers has been affected. Certain containers that had been expected to arrive in the U.S. or Europe, and thus to have been available for reuse, have been damaged or delayed in Japan. In essence, some Japanese ports have become “black holes” where containers are stuck and thus unavailable for use/reuse. Also, due to the reduced capacity of Japan’s national electrical grid, world-wide Supply Chains that have links in Japanese suppliers, have been slowed or impeded in their ability to “keep up” with the other parts of their networks.
It is critical for managements to be more proactive, and anticipate Black Swan type occurrences. They must remember those immortal words that “stuff happens, and then it happens again”. Obviously, some things like earthquakes are very difficult to predict. But disaster planning should be a regular and recurring part of the management process. Companies should always take pains to make sure that they are not overly dependent on a single supplier, or a single region on the world. They should take the time and effort required to investigate just where their Supply Chains are vulnerable, since the ultimate sources of some of their key raw materials suppliers may not be clear or obvious.